Bermuda’s New Corporate Tax and How It Works

Bermuda has long been a hub for international business due to its unique fiscal environment. For decades, companies operated under a system that differed from most developed economies. Now, the territory is implementing a new corporate tax, aligning with international initiatives and reshaping the financial obligations for many companies on the island.

Bermuda’s Traditional Tax Framework

Historically, Bermuda did not have a direct corporate income tax. The government funded its operations through other means, creating a distinct fiscal environment for the exempted companies that conducted international business from the island.

The primary source of government revenue has been a Payroll Tax, calculated on the remuneration paid to employees and shared between the employer and the employee. Another revenue source has been Customs Duties, applied to nearly all goods imported into Bermuda. These duties are a direct cost for businesses bringing in equipment and supplies.

Corporations have also been subject to other levies. These include stamp duties on certain legal instruments and transactions, as well as land taxes for companies that own real estate in Bermuda.

The New Corporate Income Tax Regime

Bermuda’s Corporate Income Tax Act 2023 introduces a corporate income tax effective for fiscal years starting on or after January 1, 2025. The law aligns with the Organization for Economic Co-operation and Development’s (OECD) Pillar Two initiative, which seeks to ensure large multinational corporations pay a minimum tax in each jurisdiction.

The tax applies to Bermuda-based businesses that are part of a Multinational Enterprise (MNE) group with consolidated annual revenues of €750 million or more. This threshold means the tax is focused on large, international operations, leaving most local enterprises unaffected.

The law also provides for specific exemptions for certain types of entities, even if they are part of a large MNE group. These “Excluded Entities” include governmental bodies, non-profit organizations, pension funds, and certain investment funds that are the ultimate parent entity of their group. These carve-outs are designed to focus the tax on commercial corporate profits.

Calculating the Corporate Income Tax

The law establishes a statutory corporate income tax rate of 15%, which is applied to the net taxable income of the Bermuda-based entity for each fiscal year. The calculation begins with the entity’s financial accounting net income or loss, determined using recognized standards like IFRS or US GAAP.

From this financial accounting income, several adjustments are required to arrive at the final taxable income base. A notable adjustment is the Economic Transition Adjustment (ETA), an election that adjusts the tax basis of a company’s assets and liabilities to their fair value to smooth the transition into the new tax system.

A key part of the calculation is the application of Foreign Tax Credits (FTCs). Businesses can reduce their Bermuda tax liability by claiming credits for corporate income taxes paid in other jurisdictions. This mechanism prevents double taxation and ensures that the ultimate goal is a minimum effective tax rate of 15% across all jurisdictions where an MNE operates.

Compliance and Administrative Obligations

Entities within the scope of the new tax regime face several new administrative duties. The first step for an in-scope MNE group member is to register with Bermuda’s new Corporate Income Tax Agency, which was established to administer the tax.

Following registration, the primary ongoing obligation is the filing of an annual Corporate Income Tax (CIT) return. This return must be filed for each fiscal year, providing a detailed calculation of the entity’s taxable income and the resulting tax liability.

Payment of the tax liability calculated on the CIT return is also required. Failure to comply with registration, filing, or payment obligations can result in penalties and interest charges.